B’buster KO’d by nice guy policy

Vidtailer hints at bankruptcy

A competitive market and its decision to eliminate late fees hammered the nation’s largest vidtailer in its most recent quarter — a period dismal enough that the company warned it may be forced to seek bankruptcy protection.

Blockbuster lost $491 million over the most recent three-month frame and also saw revenues slip slightly, from $1.41 billion to $1.39 billion.

Much of its loss was the result of a goodwill impairment charge related to its separation from former parent Viacom — essentially writing down the value of the company. Blockbuster said it would have bled only about $25 million without the various charges. But the vidtailer was unable to make up even that smaller amount with online business. Subscriber numbers there remain flat, at just a fraction of Netflix’s sub base.

Blockbuster was able to narrow its loss compared with the weak third quarter of 2004, when the company lost $1.41 billion, much of that also in non-cash charges.

The bankruptcy warning came in a Securities and Exchange Commission filing in which the Dallas-based vidtailer disclosed it is seeking new agreements with lenders. If those agreements don’t come through, the company warned it might seek bankruptcy protection.

Seeking more cash, Blockbuster also said it had arranged to sell $150 million worth of convertible preferred stock to institutional holders. An over-allotment provision could raise an additional $22.5 million.

In a conference call Tuesday, the company said it would slash marketing costs and sell or close smaller chains it owns, including Movie Trading, Video King and Mr. Movies.

Company also will garner $25 million by selling direct-to-video studio DEJ Prods. and will unload several game-specialty stores.

Blockbuster has lost $606 million through the first nine months of the year.

Despite the bad news, investor confidence wasn’t totally shaken.

Stock slipped by only 10¢, to $4.20, as analysts generally agreed with the move of eliminating late fees. In the conference call, Blockbuster chairman-CEO John Antioco said the firm would maintain that policy.

Blockbuster made the controversial decision at the beginning of the year to get rid of late fees, a move akin to a credit card firm eliminating finance charges. Late fees accounted for 13% of total Blockbuster revenue in the third quarter of last year.

Blockbuster took the position that it needed to become more customer-friendly to compete with Netflix, which collects monthly fees but no late charges. Netflix now has 3 million subs, three times as many as Blockbuster’s member service.

Blockbuster has also gotten squeezed on its other flank by Wal-Mart and discount retailers, which often sell DVDs at prices competitive with rental fees. Customer preference for repeat viewings have also shifted DVDs toward sales and away from rentals.

Blockbuster has thus far been unable to capitalize on shrinking theatrical distribution windows, which have given a boost to the DVD rental and sale market.